What Is a Deductible? Definition and How It Works
Whether you’re new to insurance or getting ready to enroll in another plan before open enrollment, you’ve likely seen the term “deductible” while comparing policies. A deductible is a key characteristic of virtually every insurance plan. Your insurance deductible also significantly impacts how much you pay for coverage. But what is it, exactly?
In this guide, we’ll look at the definition of deductibles. We’ll also discuss how deductibles work and how yours can affect your monthly costs.
What does "deductible” mean?
In most cases, a deductible is the amount of money you — the insured — must pay for medical care before your insurance plan starts to pay.
When you pay a deductible, you’re actually paying some or all of the allowed amount for your treatment. The allowed amount, or allowable charge, is the maximum dollar amount your insurance provider considers to be reasonable for a medical service or treatment.
Your deductible amount may be high or low, depending on the type of plan you choose. Regardless, your insurance company typically begins paying once you reach your predetermined deductible, though that’s not always the case.
What’s the difference between a deductible and an out-of-pocket maximum?
Your deductible is the amount of money you have to pay for eligible healthcare services before your insurance plan covers costs. Your out-of-pocket maximum is the amount you must spend on eligible expenses before your insurer begins covering all your costs.
Qualifying expenses for your out-of-pocket maximum vary by plan but often include:
It’s easy to confuse deductibles and out-of-pocket maximums. The two numbers may even be the same. That said, out-of-pocket maximums are often higher than deductibles. For instance, you may have a $1,500 deductible and a $4,500 out-of-pocket maximum.
How do deductibles work?
Deductibles are relatively straightforward once you understand what they are. Consider the following scenario.
Your health insurance plan has a $1,500 deductible and a $4,500 out-of-pocket maximum. You’re hospitalized and undergo surgery. At the end of your stay, you’re presented with a $12,000 bill.
Thanks to your health insurance plan, you’re only fully responsible for the first $1,500. After you pay your $1,500 balance, your health insurance plan will split the cost with you until you’ve paid your out-of-pocket limit ($4,500). At that point, your insurer will pay the remaining balance.
Once you reach your out-of-pocket maximum, you won’t have to pay additional healthcare costs for the rest of your enrollment period. Keep in mind that your deductible and out-of-pocket maximum reset at the end of each enrollment year.
Pro tip: While most health, dental, and vision deductibles work similarly to the scenario above, some insurance plans come with a per-occurrence deductible.
A per-occurrence deductible means you’re responsible for paying a predetermined deductible each time you file an insurance claim. Common examples of per-occurrence deductibles are auto insurance or homeowners’ insurance deductibles. With these types of plans, you often have to pay a full deductible — such as $400 — every time you file a claim with your insurance company.
Do copays count toward a deductible?
Usually, copays don’t count toward your deductible, but they may count toward your out-of-pocket maximum. Many other costs count toward your deductible, including:
- Hospital bills
- Lab tests
- CT scans
- Doctor’s visits not covered by a copay
- Medical devices, like CPAP machines or pacemakers
For more information on expenses that go toward your deductible, review your plan’s terms or speak with your human resources representative.
What is a good deductible for health insurance?
Ultimately, a “good” deductible depends on your financial circumstances, overall health, and savings goals.
If you’re young, relatively healthy, and looking for fewer upfront healthcare costs, then a high deductible health plan (HDHP) may work well for you. On the other hand, you may prefer a low deductible health plan (LDHP) if you want your insurance coverage to kick in as quickly as possible.
Let’s take a closer look at each deductible plan to help determine which is right for you.
What is a high deductible health plan?
True to its name, an HDHP is an insurance plan with a higher deductible than traditional insurance coverage. Also known as a consumer-driven health plan, HDHPs allow enrollees to reduce their upfront costs with lower insurance premiums.
These low monthly premiums are offset by a higher deductible, meaning enrollees have to spend more money before their insurance coverage kicks in. A health insurance plan must meet the following criteria to be considered an HDHP:
- The plan should have a deductible of $1,400 or higher for individuals and $2,800 or higher for families.
- The plan’s out-of-pocket costs shouldn’t exceed $7,050 for individuals or $14,100 for families.
To help reduce the financial burden of medical care on an HDHP, they’re often paired with health savings accounts (HSAs). HSAs allow you to save tax-exempt money in an account and use it to cover medical costs. Any unused funds are rolled over to the next year.
What is a low deductible health plan?
A low deductible health plan is just that: an insurance plan with a lower monthly deductible. LDHPs usually come with higher upfront costs. That said, it’s easier to meet your deductible and activate your insurance coverage with an LDHP, which may help you save money in the long run.
Is an HDHP or LDHP better for me?
Still not sure if a higher or lower deductible is right for you? Consider the following to decide which plan might work for your health needs.
|An HDHP may be right for you if…
||An LDHP might be right for you if…
|You’re young and in relatively good health.
||You’re over the age of 65 or have an ongoing medical condition.
|You rarely visit the doctor.
||You visit the doctor often due to an existing or chronic condition.
|You don’t have any need for ongoing prescription drugs.
||You regularly use prescriptions or anticipate using more prescriptions in the near future.
|You aren’t planning on becoming pregnant in the next 12 months.
||You’re planning to become pregnant and will need to see a doctor regularly in the next 12 months.
|You don’t have any dependents.
|You have one or more dependents on your insurance plan.
|You are financially able to cover unexpected, out-of-pocket medical costs.
||You anticipate medical expenses in the next 12 months due to a pre-existing condition, upcoming procedure, or other concern.